Understanding the tax consequences of buying a work vehicle can be complex and confusing.
The general concept is that if you buy a motor vehicle for work related travel, you are able to claim the work portion of the expenses incurred as a deduction, however under current temporary tax measures there are some circumstances where you can claim the cost of the vehicle.
How you claim a deduction for these expenses depends on many factors, such as if you are an employee or sole trader, what type of vehicle you purchase and if there is any private use of the vehicle. See below for a discussion on the factors which determine what method will be most tax effective for your situation.
Cents per kilometre vs logbook method
If you are an employee or a sole trader, you can either claim your car expenses using the cents per kilometre method or the log book method.
Under the cents per kilometre method, you can claim up to 5,000 kilometres of work related travel at a rate prescribed annually by the ATO. For 2021, this works out to a maximum deduction of $3,400. This method requires the least amount of administration as you do not require written receipts to substantiate your claim, but you do need reasonable evidence that you actually traveled the kilometres for work purposes.
The other method to claim car expenses is known as the logbook method. To claim under this method, you need to keep a logbook for 12 continuous weeks detailing all your work related travel to give you a log book percentage. If the logbook states your travel is 70% work related for example, then you can claim 70% of all your vehicle expenses, including depreciation of the vehicle and financing costs. The logbook is valid for 5 years, unless your circumstances change.
One key difference between these methods is that you cannot claim anything for the capital cost of your car under the cents per kilometre method. This is because the prescribed ATO rate already takes the car depreciation into account. On the other hand, the logbook method allows you to claim a depreciation deduction for the work-related portion of the cost of the vehicle.
Further, if you are a sole trader and use the small business concessions, you are currently eligible to claim the work-related portion of the full cost of the car in the year of purchase. The flip side to this is you will also need to declare the proceeds on the eventual sale of the vehicle as assessable income, which is taxed at your marginal tax rate in the year of sale.
Car vs Ute or Van
If your vehicle isn’t considered to be a car for tax purposes, you cannot claim using the cents per kilometre method. Rather, you must claim the portion of your vehicle expenses that relate to work use. A vehicle is not considered to be a car if it has carrying capacity of one tonne or more, or if it is able to carry nine passengers or more (for example, some utes and vans). The ATO states you do not need to keep a logbook to determine the work related use percentage for these vehicles, but it is recommended. It is important to note that not all utes and vans satisfy these conditions, so it is important to confirm the carrying capacity for your vehicle.
Car Cost Limit
If you are claiming car expenses under the logbook method, you can claim the work related portion of the cost of your vehicle up to the car cost limit. This is the maximum value you can use to calculate your depreciation claim. The car cost limit changes yearly – for 2021 it is $59,136 (GST inclusive). As an example, if you are a sole trader registered for GST and purchased a car in the 2021 year for $80,000, the most you can claim is 10/11ths of the car cost limit as a depreciation deduction, which is $53,760. You are also entitled to claim back $5,376 as a GST credit.